'Boxes' may impact U.S. farm policy

Doreen Muzzi | Jul 13, 2001

So, what does it all mean, and why should you care whether the check you receive from your local USDA Farm Service Agency office is put into a red, yellow or blue box, as long as it ends up in your checking account?

The WTO compares the “boxes” it uses for classifying trade subsidies to traffic lights. When it comes to agricultural trade and commodity subsidies, however, it’s not quite that simple.

While the “green box” does roughly translate into a green go signal, and amber could be considered a cautionary light, there is no red box. Instead, the WTO has invented a “blue box,” which is used for what the organization’s trade agreement considers production-limiting programs.

To further complicate matters, U.S. farmers could consider themselves ticketed for running a red light if the “amber box” subsidies exceed pre-set reduction commitment levels. In addition, there are exemptions for many of the boxes, including those designed to help make developing countries more trade competitive.

In an effort to simplify the “boxes” creatively conceived by the World Trade Organization agreement, we’ve provided a brief description of each box along with examples of its contents.

Green box

Agriculture-related subsidies that fit in WTO’s “green box” are basically policies that are not restricted by the trade agreement because they are not considered trade distorting.

In order to qualify for the “green box”, WTO says a subsidy must not distort trade, or at most cause minimal distortion.

These “green box” subsidies have to be government-funded, not by charging consumers higher prices, and must not involve price support. They tend to be programs that are not directed at particular products and include direct income supports for farmers that are decoupled from current production levels and/or prices.

If you were to dump out the contents of this imaginary “green box” you would likely find environmental and conservation programs, research funding, inspection programs, domestic food aid including food stamps, and disaster relief.

Amber box

Agriculture’s “amber box” is used for all domestic support measures considered to distort production and trade.

As a result, the trade agreement calls for 30 WTO members, including the United States, to commit to reducing their trade-distorting domestic supports that fall into the amber box. WTO members without these commitments are required to maintain their “amber box” supports to within 5 to 10 percent of their value of production.

What all of this means, according to Mississippi agricultural economist Darren Hudson, is that any support payments that are considered to be trade distorting and are subject to limitations and disciplines fall into the amber box.

Agricultural subsidies, in the United States, that are listed as changing production and/or changing the flow of trade include commodity specific market price supports, direct payments, and input subsidies.

Blue box

Included in the “blue box” are any support payments that are not subject to the “amber box” reduction agreement because they are direct payments under a production-limiting program.

To be “blue box” policies, Hudson says, direct payments must be made on fixed areas and yields, or payments must be made on 85 percent or less of the base level of production. Livestock payments must be on a fixed number of head.

The blue box, WTO says, “Is an exemption from the general rule that all subsidies linked to production must be reduced or kept within defined minimal levels. It covers payments directly linked to acreage or animal numbers, but under schemes which also limit production by imposing production quotas or requiring farmers to set aside part of their land.”

Blue box opponents want it eliminated because they say the payments are only partly decoupled from production, or they want an agreement in place to reduce the use of these subsidies. Defenders say the blue box is an important tool for supporting and reforming agriculture, and for achieving certain “non-trade” objectives and argue that it should not be restricted as it distorts trade less than other types of support.

“Trade agreements are going to be the way we handle agricultural issues from now on, specifically multi-lateral trade agreements such as the North American Free Trade Agreement, the Global Agreement on Tariff and Trade (GATT), and the World Trade Organization (WTO),” says Hudson.

Hudson compares the WTO trade agreements to a golden straightjacket.

The WTO agreement is golden, he says, because it allows access to larger markets for U.S. producers and allows greater choice for our consumers. “The Principle of Comparative Advantage suggests that global welfare is increased when markets are opened up in free trade. Thus, the ‘golden’ part means that prosperity is generated under free trade.

“However, to achieve this goal, international agreements must be made to set the rules of the game. This sometimes limits our ability to pursue domestic policy that we might feel is appropriate,” Hudson says. “Failure to comply with the rules opens us up to retaliation by trading partners and decreased confidence in U.S. markets. This works the same for our trading partners as well. This is the straightjacket we are forced to wear under the WTO agreement.”

Put simply, this “straightjacket” worn by the United States, and several other countries participating in WTO talks, restricts Congress’ ability to develop domestic farm policies because any subsidies must now come under WTO limit levels. “If we didn’t have the $19.1 billion cap on spending under WTO, we’d just spend whatever we need to spend on domestic agriculture subsidies,” Hudson says.

Mickey Paggi with the Congressional Budget Office says WTO consideration will play a key role in the adoption of any new farm policy. Specifically, Congress must keep any expenditures authorized in the 2002 farm bill in line with the budget authority levels consistent with WTO agreements.

Paggi says, “Our hands are a little bit tied, but hopefully the benefits you gain with open global trade outweigh what you lose on domestic subsidy flexibility.”

Hudson agrees, saying, “Overall, the benefits of free trade will outweigh the loss of ability to pursue specific policies. That is not to say that all industries will benefit. Some industries will be displaced because they are not internationally competitive, but the overall economy will be stronger.”